Appendix A Technical discussion of the differences between CBA and EIA
The difference between cost benefit analysis and impact analysis is illustrated in the diagram below, which depicts effects on the electricity market, with and without the commissioning of New Hydro (here representing any new large hydro scheme in the lower Waitaki). Without New Hydro the electricity market is described by the supply line S1 facing demand D, so that Q1 electricity is supplied at a price of P1. With New Hydro, the national supply line shifts down to S2, which enables a lowering of price to P2 and some increase in consumption to Q2 .
Impact analysis is concerned with the increase in activity (Q2-Q1), and the distribution of the value of that activity across various input suppliers and recipients of income. This corresponds to the area beneath the supply curve between Q2 and Q1, valued at P1 in the inter-industry input-output models used for such analysis, on the assumption that prices do not change significantly (a reasonable assumption for small projects). It may also include the flow-on effects in other product markets as the impacts of increased output in the electricity market spread through other sectors that supply or use electricity. Economic multiplier coefficients are used to estimate the flows of inputs and outputs between sectors, the leakage of expenditures out of the locality and retention of business activity within the locality as the original injection of expenditure gets used through subsequent rounds of spending.
Cost benefit analysis aims to calculate the economic surpluses generated by the change in activity, allowing for changes in price. These are the triangular areas in the diagram, both a surplus to consumers from lower electricity prices, and a surplus to producers from increased sales at the margin. The costs of achieving these surplus gains (the area between Q1 and Q2 and below S2) are deducted in calculating the net benefit of the proposal. There will also be flow-on effects into other sectors, but to calculate these effects requires a computable general equilibrium model that allows for price changes in all other sectors consequent on the change in electricity price.
This is complex and beyond the scope of the current regional analysis of the Waitaki. However, the diagram still serves to illustrate that impact analysis and cost benefit analysis measure quite different things. This is because cost benefit analysis is specifically interested in the opportunity cost of resources used in a project, it will also encompass a wider range of effects than the expenditures examined by impact analysis. It uses the value of input resources in their best alternative uses as a measure of those inputs' opportunity costs (eg farm production forgone by water diversion to other uses). In principle this includes inferring a monetary value for uses that have no market value (such as in-stream recreation), but in practice such uses are often weighed up in other ways, outside the monetary analysis.
